Beruflich Dokumente
Kultur Dokumente
5,000,000
The contingent asset and related contingent gain are only disclosed, because the
case is still under appeal by the defendant.
Problem 3
During 2014, Delavingne Company is the defendant in a breach of patent lawsuit.
The lawyers believe there is an 80% chance that the court will not dismiss the
case and the entity will incur outflow of benefits. If the court rules in favor of the
claimant, the lawyers believe that there is a 70% chance that the entity will be
required to pay damages of P2,500,000 and a 40% chance that the entity will be
required to pay damages of P1,000,000. Other amounts of damages are unlikely.
The court is expected to rule in late December 2015. There is no indication that
the claimant will settle out of court.
A 6% risk adjustment factor to the cash flow is considered appropriate to reflect
the uncertainties in the cash flow estimates. An appropriate discount rate is 10%
per year. The present value of 1 at 10% for one period is 0.91. What is the
measurement
of
the
provision
on
December
31,
2014?
a. 3,500,000
b. 1,823,200
c. 1,659,112
d. 0
Solution Answer c
Weighted Probabilities:
. 70 X 2,500,000 X 80
. 40 X 1,000,000 X 80
Expected cash flows
Multiply by risk adjustment factor (100% + 6%)
Adjusted cash flows
Multiply by PV of 1 at 10% for one period
Present value of cash flows
1,400,000
320,000
1,720,000
1.06
1,823,200
.91
1,659,112
Problem 4
Wolz Company sells motorcycle helmets. In 2015, the entity sold 5,000,000
helmets before discovering a significant defect in their construction. By
December 31, 2015, two lawsuits had been filed against the entity. The first
lawsuit, which the entity has little chance of winning, is expected to be settled out
of court for P3,500,000 in January 2016. The legal counsel believed that the
entity has a 50-50 chance of winning the second lawsuit, which is for P1,000,000.
What is the accrued liability on December 31, 2015 as a result of the lawsuits?
a. 3,500,000
b. 4,500,000
c. 6,000,000
d. 8,500,000
Solution Answer a
The loss on the first lawsuit is both probable and measurable and therefore can
be accrued as a provision.
The loss on the second lawsuit is disclosed as a contingent liability because the
loss is only possible.
Problem 5
Milagros Company issued the 2015 financial statements on March 1, 2016. The
following data are provided by the entity for the year ended December 31, 2015:
Amount owing to another entity for services rendered
during December 2015
Estimated cost of relocating an employee from head
office to a branch in another city (employee will
physically relocate in January 2016)
Estimated long service leave owing to employees
in respect of past services
Estimated cost of overhauling machine every 5 years
(the machine is 5 years old on December 31, 201
350,000
120,000
1,300,000
170,000
1,300,000